This morning the market is up on the news that consumer spending was higher than expected while incomes, though up, were lower than expected. The savings rate fell to 3.3%. At least we are still saving something. What was interesting about these numbers was that wages and salaries were up .5% but most of that was caused by working longer hours not with an increase in workers.

In every economic recovery jobs lag but the first sign of a jobs recovery is longer work weeks and an increase in part time workers. That seems to be holding true for this one though it seems slower.

ISM manufacturing for February and construction spending for January were also reported this morning. Construction spending was anticipated to be down .6%, an improvement from last month when it was down 1.2%. The actual number was in line with the expectations. The ISM index was targeted to be 58 but came in at 56.5. The market held up after these reports.

The numbers continue to show a slowly improving, struggling economy. Why hasn’t all that government spending translated into a stronger economy?  Maybe because a lot of the spending will happen this year and next and most of the money so far has been used to save the banks. Maybe that was necessary but at some point the rest of the economy needs to recover. Healthier banks have not helped the overall economy yet.

Good Trading
Steve Peasley

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Wholesale inflation numbers reported this morning also jumped. January’s number was up 1.4% but core inflation which excludes food and energy was up only .3%. The problem is that both numbers were above expectations.

We will see retail inflation numbers tomorrow. I have a feeling that the producers might be experiencing inflation but they are going to have a hard time passing it along to the consumers. The economy is just too weak at this point to absorb price increases.

It may not feel like it but the economy is gaining strength and will likely continue to do so throughout most of this year. The stock market will realize this and will rise, just do not expect it to be in a straight line or expect it to be like last year’s rally. The rally is going to be much more muted this year.

Good Trading
Steve Peasley

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By mid week, after a couple good days, we had a sell off on Thursday which was broad based and painful. However, this morning with the bank stress test and an employment report for April behind us without any surprises the market decided to rally again, at least so far this morning. This is an obvious case of the market climbing a wall of worry.

The economic numbers actually were very encouraging this week. Retail sales were up for April by .3% and for last week up .7%, but what was more surprising was the first time jobless claims which fell by 34,000 this week and the four week average fell as well by 14,759. True jobless claims sit at over 600,000 which are very high but the stock market cares about the trend and is looking for the beginning of the change. That seems to be happening. Can this change turn into actual growth? At some point it will but not for a number of months, maybe by the fourth quarter this year or next. At some point the worry will turn to the strength of the recovery but so far no one is talking about that, yet!

We have had several weeks in which economic numbers, though still showing us that the U.S. economy is in a recession, seem to point to a turn from free falling to just falling or leveling off. The just ended earnings season came in better than expectations. Of course those expectations were severely downgraded at the beginning of the year therefore beating them is not all that difficult. The real test will be the sustainability of improving numbers. Can that happen?

I believe it will. The LIBOR rate is now below 1% when a few months ago it was as high at 5%. That is the rate banks lend to each other. The mortgage rates are at 5% or less and this week we saw productivity increase by .8%. Add these stats to all the others these last few weeks and we have strong evidence that things will get better. Finally, China, who embarked on their own stimulus plan, is already showing signs of strengthening growth despite the slow down in exports. The guidance, by independent firms, is calling for an increase in China’s GDP from 6% growth to 8% this year.

Does this mean the stock market is going to rally straight up from the March 9th low? Probably not. We will have corrections along the way. Any correction will be one to buy not sell. At the same time taking profits every so often is not a bad thing. Since China is already recovering and growing we have increased our exposure to the Asian market. You need to go where the growth is and since the stock markets of the Far East fell a lot harder than ours it has made all of Asia a good place to invest, despite the risks of lack of transparency and multiple books that their companies keep.

It is time to invest and has been for several weeks. No one knows when and where the bottom is but we can look back and clearly see a strong bottom of the various markets that took place on March 9th. Put fear aside and let’s make some money.

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The news of the fate of GM and this week’s G20 meeting is putting a crimp on the bull move in the market. In GM’s case it was the President’s rejection of their restructuring plan and the President’s speculation on a bankruptcy filing that spooked the market, though that might be the best solution for the car company. Of course that might have been best a couple months ago as well before billions of tax payers’ dollars were given to them. The G20 meeting in London has the market focused on what they might or might not do once the meeting is over. There is little faith in what will come out of the meeting.

Here at home it’s the unemployment numbers that come out on Friday that will garner attention by the traders. It is expected that many jobs will be lost. ADP’s survey this morning said that it will be around 742,000. That survey has been wrong in the past but a little more accurate in recent months. The official number will tell us what March really looked like. On the brighter side, the announcement of layoffs, though still high, have actually fallen for the last two months in a row. That is a leading economic indicator and just might signal less dire times ahead.

It’s time to be buying not selling. Just be very particular what you buy. Companies with low debt, high cash balances and clear earnings picture look very attractive.

Good Trading
Steve Peasley

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So is the bear market over? It is possible. We are having a healthy bounce and yes it could be sustainable. The news out of Washington is not nearly as bleak as it has been, but is it enough to turn the economy? The stock market for the moment thinks it might be. Monday’s very large rally was a continuation of the previous two weeks and Tuesday only gave back some of the rally, while the very volatile Wednesday was starting to show signs of an over reach to the up side. Thursday was up strongly and Friday so far is down. There will likely be a pull back and that pullback will be one to buy if we hold the recent lows. On a chart we see a ‘V’ bottom, just the opposite of what I expected a few weeks ago when I said in this Newsletter that of the two possibilities of bottoming, one being a ‘V’ the other a ‘U’, I expected a ‘U’. That is not happening. At the risk of being wrong again I do think we have put in the ultimate bottom and the possibility of a pullback is very high.

Meanwhile gather your list of stocks. That list should be full of companies with growth, cash and little or no debt; solid companies with great fundamentals. Stocks are still reasonably priced but next month starts the earnings season for the first quarter and the numbers are not going to be pretty. The question is has the market built those numbers into the expectations? No one of course has that answer.

This week we have seen some good news in housing, a restatement of how bad the fourth quarter was last year, being one of the worst in history, and possible good news in toxic debt removal from banks and recapitalization. All good things.

However, the market has historically embarrassed the most experts and pundits it can, so beware of the experts calling a bottom or an economic turn around. Of course your newsletter editor can be, has been, and will likely in the future be one of the embarrassed. I called for the ‘U’ bottom and got a ‘V’. When in the market be prepared to be wrong.

We have suggested you buy gently and gather your list of stocks. That appears to be good advice. Buy more aggressively on any pullback. If we did not hit the bottom a few weeks ago we are very close.

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The big economic statistic of the week was today’s unemployment rate for February. The expectation was for a poor jobs report and an unemployment rate to exceed 8%. What we got was exactly what was expected. The market breathed a sigh of relief in the morning but it’s Friday and the day is early. Expect unemployment to reach about 10% nationwide before it starts to improve. It will continue to rise even when we see evidence that the recession is waning. There is no evidence of that yet, but it will end despite what many think. The Depression word should not be part of the discussion. Could we go into a depression? Yes, but the probability is slim. 

There was a plethora of economic statistics released this week and I don’t want to go over all of it, but it is prudent and enlightening to touch on a few data points. First, the ISM (Institute of Supply Management) report for February rose to 35.8% from January’s reading of 34%, a very slight improvement which may or may not be statistically important but any reading higher month over month is good though any reading below 50% is a shrinking economy. Construction spending fell 3.3% when expectations were for a fall of 1.6%. This report was for January. January factory orders were down 1.9%, much better than the expectation of a fall of 3.5%. Finally, retail sales in February rose. All these are backward looking numbers but they certainly paint a picture of a falling economy with hints of stabilization. The recent bad news is a direct result of the liquidity crunch that froze all economic activity in October and November before it started to loosen. Liquidity is still tight. We are far from being out of the woods but we can see the end of the forest as we slog our way forward. 

If we look for any sign or spark of hope, it is in the news that seems to becoming less Draconian. Less bad news means we are still falling in economic activity, but the pace of the fall is slowing. A recent news article spoke to announcement of layoffs in February that appeared to be less in number than in January, but that was after a 14 year high in layoff announcements in the first month of the year. The consumer seems to be spending a bit more. Housing and refinancing is still very weak, but there are small signs of improvement in California where sales of existing homes was flat last month but rose the month before and inventory actually fell. However, new home construction is in the basement and digging a deeper hole. Foreclosures are increasing, but there is a plan released by the White House to help. It will take time to see any impact but frankly, foreclosures will continue to rise. In past loan work outs we have seen half of them return to the foreclosure process. I think much of this effort is wasted. Affordability is very good and interest rates low. Buyers are starting to come back but very slowly. 

The market has fallen 25% since the first of the year. That 25% can be directly contributed to the lack of clarity and focus of the stimulus package. Despite the President’s smooth speeches, the constant drum beat of the evils of our system and actual policies that have been announced and passed have been just as toxic to the stock market as toxic mortgages are to the banks. 

The hope the market had for the ‘stimulus’ plan of $800 billion disappeared as the details showed it to be a multi year ‘spending’ package packed with pork barrel spending. The public and the market see it for what it is not for what politicians try to spin it to be. 

For our clients we have turned very defensive with high cash levels, larger short positions and equities that are anti or out of the market. We have a few long positions in the stock accounts but only in those companies that have a clear growth of earnings path and at the same time are extremely underpriced when compared to price to book, price to earnings and price to sales. In the mutual fund program we have very high cash levels, two bond funds, a double short mutual fund and very few long funds. These efforts have enabled us to far outperform the market though we still have loss value this year. 

There will be a turn but we will wait for the bottom to show itself before moving into the market in any significant way.

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